Keeping PACE with Legal Issues Related to Clean Energy

Michael A. Wrapp,  |  January 24, 2018

Knowing a property is in need of cleaner, more energy-efficient upgrades is one thing; knowing how to cover the often large initial investment to add those is another. The first PACE program was established in 2008 to help homeowners defer the high initial costs of improvements such as rooftop solar panels. Since then, PACE programs have had a number of supporters and detractors.

Property Assessed Clean Energy (PACE) Programs

Property Assessed Clean Energy (PACE) programs help homeowners make clean, energy-efficient improvements to their properties. These programs help by creating long-term payment mechanisms so property owners can pay for improvements over time.

However, organizations like the FHFA (Federal Housing Finance Agency), Freddie Mac, and Fannie Mae (both federal mortgage associations) have opposed expansion of PACE programs. Why?

Those organizations believe PACE programs are detrimental to the home mortgage industry.

Keeping Pace with PACE

The spread of energy efficiency and conservation awareness has resulted in the rise of organizations to meet growing demand by the public. Government-sponsored incentives are common and especially so in respect to solar energy upgrades.

Although incentives have been in place on both federal and state levels for decades, too many options, too much paperwork, and the often prohibitive cost of systems all played roles in preventing most homeowners from taking advantage. As of 2011, 19 states and the federal government offered some kind of incentives to property owners installing energy efficiency systems. Those incentives range from tax credits to exemptions to tax abatements.

However, the single largest barrier to installing energy-efficient systems in homes remains cost – the average homeowner cannot afford a large purchase related to their home.

SADs Help Create and Keep PACE

The 2008 California Assembly Bill 811 (AB 811) laid the foundation for Special Assessment Districts (SADs). Not long thereafter, the City of Berkeley launched the Financing Initiative for Renewable and Solar Technology (FIRST) program. This was the first PACE program in the nation, but in short order, other cities throughout California began to implement similar programs to help homeowners become more energy efficient.

Within three years, 23 states and DC had adopted legislation to create PACE programs. Among those states were Colorado, Florida, Hawaii, Illinois, Louisiana, Maryland, Nevada, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Vermont, Virginia, and Wisconsin.

Many communities keep PACE because the programs help not just homeowners but also investors, local governments, and others. One of the most popular aspects of the PACE programs is likely that the special assessments they create run with the property rather than the property owner, which allows property owners to recoup costs when selling their property.

Part of the reason anyone installs energy improvements to a home is to recover savings over time. PACE programs enable property owners to at least break even when their property is sold before the savings are fully realized.

Other Advantages of PACE

Locally, PACE programs also create jobs, which helps stimulate the local economy, creating still more jobs. For good reason, many local communities like PACE programs.

Potential Disadvantages of PACE

One of the potential downsides to using PACE programs is that technological advances may outpace the useful life of improvement investments before they have fully paid off. Of course, that is like saying that nothing should ever be improved because eventually another, better improvement will come along – then, nothing changes because there will always be the specter of something better on the horizon.

Other concerns, however, include the fact that people in lower-income communities are largely unable to participate in these programs because they are restricted to owners – not renters. Plus, studies have shown that the administrative costs are such that most small localities will find establishing PACE programs in their community prohibitively expensive.

In addition, some argue that while property encumbered with a PACE lien may be sold at any time without any lingering PACE obligations for the prior owner, a mortgage for a property that is also encumbered with a PACE lien may be difficult to sell on the secondary mortgage market.

Opposition to PACE

Fannie Mae, Freddie Mac, and the FHFA all oppose PACE programs nationwide due to their impact on lien priority issues.

In 2010, those three organizations each established internal rules placing restrictions on any activities related to PACE programs.

Town of Babylon v. Fed. Hous. Fin. Agency (2011) became the first in a series of court challenges to PACE programs nationwide. Through those challenges, many PACE programs slowly eroded.  However, communities’ desire for energy-related improvements persists, and in time, programs similar to PACE are likely to return.

Michael A. Wrapp is an attorney with Tiffany & Bosco specializing in banking, civil litigation, construction law, financing, Indian law, and general real estate law. He originally wrote about this topic in 2013, in “Property Assessed Clean Energy (PACE): Victim of Loan Giants or Way of the Future?,” published in the Notre Dame Journal of Law, Ethics & Public Policy.